The Enterprise System Spectator

Monday, March 29, 2004

Latest from the IFS World conference

I'm in Orlando this week, attending the IFS World conference, giving a presentation on FDA regulations for electronic records and signatures and also sitting on a panel discussion regarding the impact of Sarbanes-Oxley, HIPAA, and other regulations on business.

The conference has also given me a chance to catch up on the latest developments with IFS, an global enterprise applications vendor focused mainly on certain verticals, such as aerospace and MRO, heavy industrial, transportation, high tech, and asset-intensive industries such as utilities. Some key points I've picked up so far from the conference:

IFS continues to emphasize its global operations. Although IFS has been making good progress in the U.S., it is not anywhere near as well known as players such as Oracle, SAP, and PeopleSoft, which it often competes with in its key vertical industries. But in terms of its global reach, the company is a strong presence internationally. The company is headquartered in Sweden, with 79 offices in 49 countries. In addition to its natural strength in Europe, it has also made good progress in Asia. IFS already has a global development center in Sri Lanka. It also has been working with NEC in Japan for over seven years to establish itself in Japan and to pursue the China market, where many Japanese-owned companies have been setting up offshore operations. During the conference, IFS announced that NEC has taken an equity position in IFS and now owns 10% of its shares. This will allow NEC to more directly invest in IFS functionality for the Asia market and expand IFS's implementation capabilities.

IFS illustrates the extent to which enterprise applications software has become a global market: here is a Swedish vendor, with a development center in Sri Lanka, holding its international conference in the United States, making an announcement about its partnership with NEC in Japan to take advantage of market opportunities in China.

IFS extends its component architecture. Since the late 1990s, IFS has been developing its systems on a component model, allowing individual modules (actually, objects or components) to be implemented and upgraded separately from one another. The architecture, known as Foundation One, allows new technologies to be swapped in and out of the technology stack without causing major disruption of the client base. It also allows an easier path for interfacing or integrating with other system.

In the conference, IFS described its extension to this architecture, which it now designates as a service oriented component architecture (SOCA). The extensions add a layer of messaging via XML and web services to allow other applications to integrate easily with IFS, allowing "composite applications" to be deployed from multiple vendors. IFS contrasted its approach to that of other vendors that try to lock in companies to a single technology, such as Oracle and Microsoft, which basically own the entire technology stack from database, through tools, to applications. In this regard, IFS's approach is similar to SAP's, with its Netweaver technology, although IFS points out that certain elements of SAP's technology stack, such as its application server and ABAP language, are proprietary to SAP. In contrast, IFS uses 100% publicly available tools and technologies, as illustrated by its offering a choice of IBM Websphere, Oracle Application Server, and even JBOSS, an open source application server.

IFS recognizes that its approach makes it easy for clients to implement other systems besides IFS. But as IFS president Michael Hallen said in his keynote address, "If we make it easy for you to replace us, you will be more likely to keep us." I think this is an enlightened view.

My only complaint regarding IFS is its low profile, perhaps keeping with its Scandinavian roots. There are only about 30 members of the press and analyst community here, counting me. The company has some good stories to tell, such as its joint venture with Lockheed Martin. It needs to get the word out.

Friday, March 26, 2004

Outsourcing: what would Wal-Mart do?

Bob Cringley has a long article on problems the U.S. Navy has had with outsourcing to EDS. At the end of the article, he contrasts the Navy's approach with that of one of the world's most well-run corporations, Walmart. Cringley called some of his sources internal to Walmart and asked them confidentially whether Walmart would ever consider outsourcing some or all of its IT function to an outside contractor.

Those sources were clear: there is no way Wal-Mart would entrust its IT services to an outside contractor or even to several outside contractors. Doing so would threaten the entire organization. If costs are out of control and services are inconsistent, that's something to be dealt with internally, not by hoping some outside organization is smarter or more disciplined. "We have suppliers, sure, but the ultimate responsibility always remains here in Bentonville," said my Ozark IT guy. "We centralize it, we control it, we know what we are buying and what we are doing with it. Anything less is just too much of a risk."

Thursday, March 25, 2004

Subscription model for software gaining ground

According to a recent IDC research report, the shift from the traditional model of upfront software licence sales to a pay-as-you-go subscription model is well underway. The shift is driven by several factors, including customer desire for more flexibility, as well as vendor desire for a more predictable revenue stream. The report concludes that by 2010 many software vendors will receive the majority of their revenue from the subscription model.

Amy Mizoras Konary, the IDC analyst who authored the report, says,

"The old adversarial sales model, where vendors attempted to shove software down customers' throats and leave for the next deal, is becoming a thing of the past," she said. "If you look at the software market, revenues are flat, and users are leveraging open source to deal with vendors. This is causing major reconsideration of licensing models all around."

Wednesday, March 24, 2004

Survey: best practices in supply chain management

Enrico Camerinelli at Meta Group is researching best practices in supply chain management, and he is conducting a survey to back up his findings. Enrico needs participants, and he will share the results of the survey with those who respond. The survey is very brief and should only take about five minutes to complete.

To participate, simply send me a message, and I'll have Enrico send you the survey form. My e-mail address is in the side bar.

Tuesday, March 23, 2004

IT budgets: spending less but getting more

Erik Keller, in an Optimize Magazine article, points out that an optimistic outlook for the U.S. economy does not necessarily mean an end to the IT spending famine:

Many corporate executives have decided that a lean, mean, and slightly hungry IT department may be the ticket to profitability and enhanced competitiveness. Consider the following:

FedEx stated that it won't increase IT budgets through 2006. Others, including Motorola and the U.S. federal government, have echoed similar goals.

The latest Commerce Department capital-spending numbers indicate the only large-growth area is hardware, which can be largely attributed to a short cycle of PC replacement.

Not all chief executives of major IT vendors are predicting that the corporate spending freeze is over yet.

Keller also outlines three large companies that are getting more from IT budgets while spending less:

Harrah's, which tries to cut 5-10% from its IT budget every year for specific business functions.

Merrill Lynch, which cut IT spending by one-third between 2000 and 2003 by transferring responsibility and management of the IT budget to the business units, giving users better visibility into where cuts were possible and how to make better use of the technology it already had installed.

Jetblue, which spends roughly the same percentage of revenue on IT as other air carriers but spends it in smarter ways. For example, it has standardized on a single technology platform (Microsoft), it has implemented voice-over-IP technology to allow reservation agents to work from home, lessening the need for call center infrastructure; and it has deployed a paperless system for flight documentation, cutting costs of distributing paper documents to pilots.

Keller goes on to describe a number of opportunities for managing costs while maintaining benefits, such as strategic sourcing, contract management, asset utilization, and tighter software license management. He also outlines a three step process for evaluating IT cost reductions.

Monday, March 22, 2004

Agilisys continues acquisition binge

Agilisys is on a roll. Following closely after its acquisition of daly.commerce and infor, the company has announced its acquisition of Varial, a German vendor of HR and financial systems for small and mid-sized companies and public agencies. The move is probably intended to strengthens Agilisys's presence in Europe following Agilisys's acquisition of infor, another German vendor.

Varial sells its solutions entirely through a VAR network. Agilisys appears to be willing to keep the VAR network intact. "The company will operate as a separate business unit of Agilisys and continue to develop and strengthen its existing relationships with resellers and customers outside of the Agilisys Discrete, Process and Wholesale Distribution Business Units," reads the press release.

Separately, Agilisys has added four new senior executives: Michael Starr as CIO, whose resume included 14 years in the IT group at Home Depot; Marylon McGinnis as VP of Offshore Development, and formerly from GEAC, a competitor. Also coming on board are Chris Murphy as VP HR and Business Integration, and Rick Parker as VP of Global Marketing of Agilisys's Discrete Solutions Group.

Saturday, March 20, 2004

The supply-side argument for offshore software development

Is demand in the U.S. for new software about to explode? Perhaps so, if the law of supply and demand still holds.

The law of supply and demand states that, in a perfect market economy, a commodity has three economic variables: supply, demand, and price. Normally, the law is explained in terms of price as the result of supply and demand. For example, if supply is constant and demand increases, price will rise. Or, if demand is constant and supply increases, price will fall.

However, the law can also be stated in terms of demand as the result of supply and price. Consider two scenarios:

Supply remains constant and sellers drop the price. In this scenario, demand should increase. This is the strategy of retailers who mark down excess inventory to increase sales.

Demand remains constant and sellers increase the supply. In this scenario, prices should drop to the point where demand increases to consume the increased supply. This is the so-called supply-side argument for increasing the supply in order to stimulate the overall market for a commodity.

But what happens when prices drop and at the same time supply increases? In this scenario, demand should greatly increase. I would call this the "super supply-side scenario."

Now, I ask, isn't this exactly what we should be seeing with the trend toward offshore software development services, where both factors are at work?

Lower cost. It is generally accepted that labor rates for offshore software development are less costly than equivalent services in the U.S. (There are all kinds of risks that should be considered to determine total cost, which I have discussed elsewhere, but let's ignore them for now and just stipulate that costs offshore are lower).

Increased supply. As I wrote in December, offshore locales such as India and China are cranking out thousands of software engineering graduates every year, flooding the labor market with additional supply. So for the foreseeable future, there should be no shortage of software developers at the lower rates.

The law of supply and demand would indicate that the combination of lower prices and increased supply should greatly stimulate demand for software development. So if I am correct, there should be over the next few years an explosion in demand for software development in the U.S.

Sources of demandWhere will the increased demand for software development come from? Anyone who has been involved with corporate information systems knows that the backlog of new system requests and enhancement requests is measured not in months but in years. Users often give up asking for new systems because the ones they've already asked for have not been delivered. I have seen cases where system requests get so old that that the original requestor is no longer with the company. Of, if he is still around he has forgotten what it was he was asking for. At some point, users stop asking. I call this the "hidden backlog" of software development requests. The hidden backlog is sometimes manifested when a company does one successful new software development project. Suddenly users realize that they can ask for stuff and stuff gets delivered. So they begin to ask for more. Demand for software development is not like demand for baby diapers--a relatively static number based on the number of babies born each year. Dropping the price for software development can often stimulate new or hidden demand.

Demand for new commercial software packages, such as ERP or CRM, is also highly dependent on price. These systems are expensive, and many companies that could benefit from them continue to nurse along legacy systems because the price to acquire, implement, and maintain new systems is simply too high. If upfront software license fees and on-going maintenance costs were lower, there would certainly be a greater demand for new packaged systems. This argues for software vendors making better use of offshore services to drive the price point for their applications lower, thus increasing demand. In fact, this is already happening. Not only major vendors, such as SAP and Oracle, are moving development offshore. Even smaller vendors are getting into the act, such as MAPICS, which is outsourcing most of its software development to India, and Ross, which was actually purchased outright by Chinadotcom, an offshore software development organization. As vendors get better at managing offshore development, the price of packaged software should drop. In a market economy, it has to.

Outlook for U.S. jobsSome will argue that, yes, there will be an increase in demand for software, but all the jobs will be offshore. My reply is that for every U.S. software acquisition, there are many activities that must take place on-shore. For example, it is likely that initial requirements definition will be done directly with the U.S. customer. It is hard to imagine how user training and acceptance testing could be moved offshore. It is also probable that significant pieces of the functional design would need to be done in the U.S., in close collaboration with users. In all likelihood, it will be mainly technical specifications, programming, and unit/system testing that is done offshore. Even then, there will need to be a project management layer in the U.S. to coordinate activities on-shore and offshore.

Similarly, if prices for commercial software packages were to fall due to offshore software development, I have no doubt that there would be an increase U.S. sales, with increased demand for on-shore U.S. based implementation-related services such as system integration, training, and project management.

Therefore, I am hopeful that the trend toward offshore software development will increase demand for software development and package acquisition by U.S. buyers, resulting in many new jobs for IT professionals. Unfortunately, they won't be the same jobs that have moved offshore. The key for software professionals, then, is to recognize the economic realities and prepare for the types of IT jobs in the U.S. that will prosper in the coming years.

I'm interested in feedback on this point: are we seeing a general pick up in demand for software development? If so, where are the best opportunities for U.S. IT professionals?

Wednesday, March 17, 2004

Why are executives leaving PeopleSoft?

Since last June, when Oracle made its hostile bid for PeopleSoft, seven high level executives have left or have announced they will leave PeopleSoft. The departures include two former PeopleSoft GMs: Joe Davis, former head of PeopleSoft's CRM unit, who is going to run a software start-up, Coremetrics, and Doug Merrit, former head of PeopleSoft's Human Capital Management group, who has not yet announced a new position. Other executives that have left include North America VP Kyle Bowker, CRM marketing executive Brad Wilson, and Peter Gassner, the former GM of PeopleSoft's tools group, who left last July to take a position with Salesforce.com, a CRM competitor to PeopleSoft. In addition, Anne Jordan, PeopleSoft's general counsel, has given notice and plans to leave sometime this year. PeopleSoft's director of public relations is also gone (but I can't find the name).

Industry analysts speculate that concern for job security -- heightened by Oracle's threatening bid -- is behind the departures. PeopleSoft contends that the turnover is normal for a company the size of PeopleSoft and that the departures just show how talented PeopleSoft's executives are.

I might also suggest that a little turnover is good sign that a recovery is underway in the technology sector, with new interesting and challenging positions opening up for these executives to jump to.

Tuesday, March 16, 2004

A quality systems view of 21 CFR Part 11

For some time, I've been critical of enterprise system vendors who claim their systems are "Part 11 compliant." (Part 11 refers to 21 CFR Part 11, the FDA's regulation regarding use of electronic records and electronic signatures.) My complaint, which reflects the FDA's viewpoint, is that software vendors, with very few exceptions, are not regulated by FDA. Therefore, their software products cannot be said to be "compliant." Part 11 does not regulate the vendors of commercial software--it regulates the users. At most, the vendors can "support compliance" by the users.

Part of the problem lies with software buyers who too often are looking for a silver bullet for Part 11. In my experience, companies pay too much attention to vendor claims of "Part 11 compliance" and not enough attention to whether their own IT departments and users are compliant in the maintenance and use of those vendors' systems.

Although Part 11 does require certain technical features of software, such as system-generated time-stamped audit trails, Part 11 mostly deals with the administrative and procedural controls that companies must establish in their use of systems. A computer system can have all of necessary Part 11 technical features, but if a company does not establish adequate administrative and procedural controls (e.g. limiting access to authorized individuals, rotating passwords, controlling system changes), that company will not be compliant with Part 11. I don't mean to imply that companies should ignore Part 11 technical controls. I would just like to see a little more balance.

So how can companies ensure that they are compliant with Part 11? By treating Part 11--and information systems in general--as an element of the firm's quality system. Simply,

Say what you do. Companies should review all information systems-related standard operating procedures (SOPs) to ensure that all of the administrative and procedural controls mandated by Part 11 are included. For example, is there an SOP that defines information security policies, and does it include rules for assigning and rotating passwords? Does the new employee procedure include a step to have the employee sign an agreement stating that his or her electronic signature is legally equivalent to a handwritten signature? There are dozens of points such as these that should be enacted in SOPs. The easiest way to do this is to develop a checklist based on the administrative and procedural controls of Part 11 and trace each item to SOPs. Where an item is not reflected in SOPs, a gap exists and SOPs should be revised or developed to cover that item. The result of this effort is a set of information systems SOPs that include all administrative and procedural controls required by Part 11.

This assessment of the firm's information systems SOPs should also address requirements for software validation, information security, and confidentiality, as appropriate.

Do what you say. Once SOPs are developed to reflect Part 11 requirements, you must ensure that these SOPs are being followed in practice. An audit should be conducted globally to ensure that the Part 11 organizational-level requirements (e.g. new hire procedure) are being followed. The audit should also be performed on a system-by-system basis to ensure that the system-level SOPs (e.g. records retention, password rotation) are being followed. Again, a checklist can be developed directly from Part 11 to reflect these requirements. The audit should be repeated annually or bi-annually to ensure that the organization remains compliant.

Companies need to realize that there is no silver bullet for Part 11 compliance. Taking a quality systems view of information systems will ensure that companies are not only compliant from a technical perspective, but that information systems are trustworthy and reliable.

Monday, March 15, 2004

Oracle software quality improving

Nearly two years ago, I wrote about Oracle's dismal software quality in its 11i release. At the time only 16% of its user group members were live on 11i. But those who did endure the upgrade found, on average, that it cost 43% more than planned and took 39% longer than expected. Frequent bug fixes were a way of life.

Recent discussions with Oracle customers indicate that Oracle has overcome many of those problems. One CIO client of mine, who until late last year refused to upgrade to Oracle 11i, found few problems during the upgrade and is preparing to roll out the system to several new acquisitions.

Bill Swanton from AMR also sees improvements in Oracle's quality. In a follow up to AMR's survey of Oracle customers two years ago, he writes:

I contacted many of the Oracle customers originally interviewed in 2002 to see how things have changed. All agreed that the level of software quality has improved, but it could still be better. As one company told me, “It has gone from being the number one issue to number three or four.” More pressing at these customers are the classic issues common to all Enterprise Resource Planning (ERP) projects, including user adoption, change management, and data quality . . . .

The quality gap between Oracle and its competitors has narrowed tremendously in the past two years. It should no longer be a major issue in new selections, nor should it be slowing existing customers from getting benefits from their investment. Companies are managing any remaining quality issues with automated regression-testing and system management tools. Oracle is sticking to the right path, and its ongoing efforts should continue to improve the software’s quality.

Thursday, March 11, 2004

Happy days here again?

There's good news for IT consulting firms in a recent C.S. First Boston survey of 100 CIOs of Fortune 1000 companies: 46% of respondents expect to increase spending for IT consulting in 2004. In a similar survey last October, only 38% of respondants expected to increase spending on consultants in 2004. So, the trend definitely is up.

Wednesday, March 10, 2004

Microsoft Software Assurance: no bang for big bucks

John Fontana in Network World reports why some users are unhappy with Microsoft's Software Assurance program, whereby users pay maintenance fees to Microsoft in exchange for upgrades. The problem: in some cases, Microsoft has delivered no upgrades.

Scott Matthews, CTO for Digitech Systems. . . . in June 2002. . .spent $30,000 on a software maintenance contract for SQL Server under Microsoft's new annuity licensing program called Software Assurance. .... When Matthews signed the contract, a new version of SQL Server code-named Yukon was slated for release in 2003, but the ship date slipped into early 2004 and then to the end of this year, which is beyond the expiration date of his contract.

"We were specifically planning to upgrade to Yukon, which we had been expecting for ages," Matthews says. "It leaves a bad taste in your mouth. As the CTO, it puts me in a bad position to go into the CFO and tell him we got nothing for this and this and this."

Fontana points out that user dissatisfaction with the Software Assurance plan could soon hit Microsoft where it hurts. Hundreds of thousands of user contracts expire this July, and many of them probably won't renew.

Rumor confirmed: Agilisys is acquiring daly.commerce

The rumor I reported on Mar. 4 appears to be true. Agilisys has a welcome message to daly.commerce users on its web site. With the acquisition of daly, plus its earlier acquisition of German ERP vendor infor, Agilisys is moving into the triple-A league of enterprise software. According to its press release, Agilisys expects to generate approximately $250M in revenue in 2005. The combined company will have over 7500 customers and 1200 employees globally. Agilisys will also have approximately $45 million in cash on its balance sheet following the acquisition. The company's recent moves have consolidated three ERP systems and one wholesale distribution vendor: a nice combination, especially if Agilisys can integrate daly's functionality across its ERP offerings.

Tuesday, March 09, 2004

Users should push forward with RFID, despite issues

In several conferences lately, I've noticed a great deal of user interest in RFID, much or most of it driven by mandates from major players such as Wal-mart, Target, Albertson's (just announced last week), and the US Department of Defense (DoD). However, one thorny issue is that there are two competing RFID standards: one, the Electronic Product Code (EPC) standard, favored by the retail supply chain, and the other, the international (ISO 18000) standard favored by the U.S. DoD.

Enrico Camerinelli at Meta Group thinks that users should push ahead with RFID pilot projects, in spite of the uncertainty surrounding RFID standards. He writes:

Among the issues surrounding RFID technology, the hottest relates to the final standard (e.g., EPC, ISO) that -- when eventually decided -- will open the gates to its mass adoption. The fear of choosing a potentially "wrong" standard is preventing many end-user companies from launching pilot RFID projects. This is a mistake, as the benefits of getting acquainted with the utilization of the technology and the ability to shape processes around it offset the risk of choosing the wrong standard. We believe the debate surrounding RFID standards, while important for achieving consistency and direction, is in reality an excuse used to "take time" and catch the passing RFID train by those enterprise software vendors who did not foresee the wide interest in RFID and have lagged in their support.

I'm not sure which enterprise software vendors Camerinelli is referring to. In the Oracle and SSA events I attended recently, RFID was a hot topic. I think vendors are hoping that RFID will be the "next Y2K," at least in those industries where there are customer mandates.

Separately, Soundview Research encourages users to push ahead with RFID pilot programs as the only way to work out problems with the technology.

RFID is still a developing technology and, as a result, there are problems with existing tags and readers. There are concerns that new RFID technology will interfere with existing RFID technology within the areas through which products are being trafficked. It is also obvious that one frequency and one tag design will not fit every situation; each business will have to figure out how RFID technology can best be deployed in their respective warehouse or backroom. The only way to get through these hurdles is by trial and error. Nothing is going to happen while everybody is on the sidelines. Wal-Mart realizes this and continues to push forward, causing the RFID obstacles to be addressed now. As RFID is adopted, the price of chips and readers will come down, and read rates will improve. The anticipated short-term solution will be a hybrid environment with both bar codes and RFID tags being utilized until all the kinks within RFID are worked out.

IDC is now forecasting the U.S. market for RFID as $1.3B by 2008, noting that several of Wal-mart's major suppliers have launched pilot programs after realizing that Wal-mart isn't going to move its January 1, 2005 deadline. As Soundview Research notes, "Over the last couple weeks, RFID-related-technology suppliers have seen a significant increase in customer inquiries which appears to be driven by the outcome of one-on-one meetings with Wal-Mart."

Monday, March 08, 2004

Baan users flock to SSA road show

Last week, I attended the SSA road show in Newport Beach, CA, to see what progress SSA has been making in assimilating all of its acquisitions over the past two years. Interestingly, a show of hands indicated that about two thirds of the 70 attendees were Baan users. And they came with lots of questions about the future of their investment in Baan products. The team from SSA stressed to the Baan users that support would continue and be strengthened, but it was clear that the Baan acquisition is still being assimilated. Baan had some good products, such as its world class CRM, PDM, and logistics systems. Industry needs more choices, not fewer, and I would like nothing better than to short-list the former Baan products in the future.

My one complaint is SSA's insistence on rebranding all of its acquisitions with generic names. Think of the yellow store-brand canned vegetables in your local supermarket. For example, the former well-known Baan "CAPS Logistics" system is now known as "SSA Logistics and Transportation Management" or something like that--you can see what a strong impression the name made on me. Even worse, the Tier I former EXE EXEeed product line is now known as "SSA Warehouse Management"--a real bell-ringer. But wait--"SSA Warehouse Management" is not just products from the EXE acquisition. It also includes the Warehouse BOSS product that SSA picked up previously from Computer Associates. These are all good products, and it is unfortunate that SSA's marketing group has genericized the names to the point that it is impossible to discern their genealogy. It would be one thing if SSA had rewritten them to a common database schema or code base. But to this point, they are largely the same products that SSA acquired.

Most of the questions in the road show were concerning on-going support, and SSA made a big point of its plans for increasing the value of its maintenance program. The numbers that SSA presented indicate that they are doing a good job of getting customers back on maintenance. Maintenance support doesn't make for great press releases, but it's what customers are willing to pay for if the value is there.

Sarbanes-Oxley compliance and radio frequency identification (RFID) were two other topics that got strong response from the audience. I was surprised at how much interest there was on these points. The presenters indicated that customers have been asking a lot of questions about Sarbanes-Oxley, so SSA bundled together a number of their offerings (e.g. business process mapping, performance reporting) that could be used as part of a compliance initiative and is presenting them as their offering for Sarbanes-Oxley compliance. To me, there is no software silver bullet for compliance, but still users are showing a lot of interest in anything that can make the job easier.

Concerning RFID, a number of Baan customers are in the aerospace and defense sector, so the Department of Defense initiative for RFID is a real concern. Others are suppliers to Walmart or Target, so those mandates are also looming. Fortunately, SSA's acquisition of EXE last year gives SSA some real subject-matter expertise in this area, and I believe this will be a driver for new sales for SSA. If so, SSA will have acquired EXE at exactly the right time.

Sunday, March 07, 2004

PeopleSoft will offer EnterpriseOne on Linux

According to a press release, PeopleSoft is porting portions of its EnterpriseOne suite (formerly J.D. Edwards One World) to Linux. Functionality to be offered on Linux includes HR, SCM, supplier relationship management, financials, asset management, and project management. General availability will be in Q2 2004, with release of EnterpriseOne version 8.10. Linux will be supported at three tiers: database, application, and web server.

PeopleSoft already offers its Enterprise suite (the original PeopleSoft product line) over Linux, with RedHat as its distribution of choice.

Saturday, March 06, 2004

Productivity risks in offshore outsourcing

Last week, I wrote about six risks in outsourcing IT functions to offshore service providers. In response, Bob Boyd wrote to me about an additional risk: lower productivity. Bob's feedback is most interesting in that he can hardly be accused of being an opponent of offshore outsourcing. He is a VP at eFORCE, an IT services firm that offers services onshore in the US and Europe, and offshore from its own development center in India. So, Bob is speaking from direct experience. I'm quoting his entire message below, with my comments in [brackets].

I'll add another item to your offshore risk list: lower productivity. Productivity differences in software development have been the subject of many studies. These studies invariably find a large variation in productivity. The first (top) quartile is often ten times (not 10% or 100%, but 1000%) more productive than the average (let's say, the third quartile). The fourth quartile is often found to be negatively productive. That is, more time is spent fixing their code than would have been required for someone in the third quartile to write it in the first place.

In the US, starting around 2000, we effectively eliminated from the software development labor pool what used to be the fourth quartile. That has driven the productivity of the total labor pool way up in the US. Furthermore, labor rates in the US are stagnant or falling. [Therefore, U.S. programmers appear more productive for two reasons: with the general decline in the tech sector, the programmers that are still employed tend to be the better performers, and overall wage rates are weakening.]

In contrast, in India, software development is constantly attracting new entrants to the labor pool. (The Wall Street Journal noted recently that the average age of Indian software engineers is 26.) These new entrants are generally the least productive. At the same time, the labor rates for the top quartile [the most experienced and productive ones] are rising quickly. So, the average productivity of the Indian programming labor pool is falling while labor costs are rising.

So, without reference to whether US or Indian workers individually are more productive, there is a growing difference in productivity between the two labor pools. Combine that with rising labor costs in Bangalore and other tech cities and you may discover that when truly equivalent personnel are compared, there is no longer a labor arbitrage opportunity.

Counterbalancing this "labor pool productivity gap" is the higher management process discipline that Indian firms have implemented. Indian firms have had to sell their services based on some fairly abstract measures of "goodness" (CMM Levels, SEI standards, etc.) because, by definition, they are out of sight. Hence offshore firms have focused on management process discipline. Process discipline is important in overcoming the problems that beset projects with distributed development teams, operating in offset work shifts, from different cultures, with more than ten simultaneous contributors.

These same management disciplines were rarely adopted in the US because, generally, they drive up the cost of the project. In the US, it was more efficient to simply hire from the first quartile and put everyone in the same room. We all know intuitively the difference between programming as a craft ("low ceremony") and programming as engineering ("high ceremony"). This difference is highlighted by the ongoing debate between advocates of the Rational Unified Process (RUP) and Xtreme Programming. It is generally true that if software can be produced with low ceremony, it will be cheaper than if it is produced with high ceremony. However, budget decision-makers often mistake which type of project they are funding. Quite a lot of business systems development is craft work. [In other words, business IT functions, which are now being outsourced, are traditionally performed without a lot of formal project management controls. But if the formal controls are not put in place, the outsourcing initiative is unlikely to be successful. This is a risk that is generally not recognized when business executives consider outsourcing business IT functions.]

The result is that if five or six US-based, first quartile, highly productive, code-slinging cowboys can do the job and they are available, then you'll get it better-faster-cheaper than trying to send it offshore. But if, by the nature of the task, a code-slinger's posse isn't an option, then offshore may be the right answer.

Large application maintenance and enhancement projects are a good example of an offshore opportunity NOT because such projects are simpler or easier--they aren't. But because such projects are long duration, the cowboy approach doesn't work. Cowboys have a wandering nature. [In other words, the top programmers prefer to work on new development.]

I think the US is emerging from a three year period in which, when choosing between better-faster-cheaper, "cheaper" was the predominant buying criteria--because of uncertain corporate revenue projections. In the preceding dot.com days, "faster" was the predominant buying criteria, because capturing new markets was the chief strategic concern.

Bob's feedback confirms my view that offshore outsourcing is and will be an important element in business and IT strategy for some or many companies. On the one hand, business decision-makers cannot afford to exclude outsourcing as an option. On the other hand, there are significant risks and unrecognized costs in outsourcing business functions, especially when those functions and processes are not well-controlled to begin with.

Wednesday, March 03, 2004

Agilisys acquires Infor

U.S. enterprise system vendor Agilisys is acquiring German ERP vendor Infor Business Solutions (spelled, all lower case, "infor"). Agilisys is not a familiar name, but it might soon be, if it continues to buy up other vendors. Agilisys was formed in 2002 when SCT spun off its well-regarded Adage ERP system, which had excellent process manufacturing functionality. Agilisys then acquired Brain, a German vendor of ERP systems for the automotive industry. Now with the acquisition of Infor, Agilisys gets an additional 3,500 customers, mostly in Europe, with strong presence in several verticals, such as plastics, furniture, building materials, jewelry, and automotive.

When Adage was under SCT's ownership, I used to see them occasionally in new deals, especially in foods and pharmaceuticals, where the process-orientation of Adage demo'ed very well. But since the spin off as Agilisys, I have not seen them at all, at least not out here in California. Perhaps with the acquisition of two German vendors, the company is making a bigger push in Europe.

Update, Mar. 4: A reader has alerted me to a rumor circulating that Agilisys is about to acquire daly.commerce, a privately-held enterprise distribution system vendor. I have no independent confirmation of this.

Monday, March 01, 2004

Quick look at DOJ's complaint against Oracle

Last month I wrote an analysis of what I thought would be the DOJ's definition of the market in deciding whether to allow Oracle's takeover of PeopleSoft to proceed. Now that the DOJ has filed its complaint, we can see if I was right.

It appears that DOJ has limited its definition of the market in which Oracle and PeopleSoft compete as "high function Human Resource Management (HRM) software and high function Financial Management Services (FMS) software," rather than the whole array of enterprise systems, as I did in my analysis. Nevertheless, DOJ is making essentially the same argument that I predicted. I suspect that DOJ chose to limit its market definition to HRM and FMS so as to show a larger number of organizations affected. Although PeopleSoft sells the entire suite of enterprise applications, its installed base is disproportionately weighted toward HRM and FMS. So by defining the market in terms of "high function" HRM and FMS, it will be easier for DOJ to show a greater competitive overlap. Although I did indicate that Lawson competes with PeopleSoft in HR and financial systems, I still believe that this is more the case in the mid-tier, not the high end of the market.

Suppliers must aim RFID at Target

Target Corp, operator of retailers Target, Marshall Fields, and Mervyn's, is initiating an RFID mandate for its suppliers. Target is calling for its top suppliers to include RFID tags on pallets and cases in 2005, with the rest of its supplier base to comply in 2007. Target is sketchy on the details, but its program will hopefully look a lot like Wal-mart's, which I described most recently in a post on Nov. 8.

Companies seldom invest in major new technologies without some sort of external pressure, such as a major customer mandate or governmental regulation. RFID appears to be enjoying both, with pressure for adoption coming from major customers such as Walmart and Target as well as from government initiatives, such as the FDA's RFID initiative in the pharmaceutical supply chain.

I'm interested in hearing about best practices, lessons learned, horror stories, and case studies of success or failure.

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